Remittances outstrip aid 3 times over. Can they transform development?

Remittances — the money people send home to their families from abroad — account for the biggest source of external finance for low- and middle- income countries. But what do we know about where this money goes and does it help reduce poverty? Discussions about development funding tend to focus on official cash flows from institutions and donors, known as official development assistance, or ODA, and foreign direct investment, or FDI. But these flows have been overtaken by an overlooked funding stream — remittances — which actually make up a far greater portion of the money entering lower-income economies. Remittances to the global south totalled $656 billion in 2023, according to the World Bank’s latest brief on migration and development. That figure is expected to grow by 2.3% in 2024 and 2.8% in 2025, to reach $690 billion. By comparison, in 2023, total ODA was around $224 billion, while the World Bank puts FDI at around $400 billion. But these sources of funding are not enough. A recent analysis by the ONE Campaign pointed out that countries in the global south now pay out more in debt repayments than they receive in grants and loans. What’s more, whereas ODA and FDI are usually negatively impacted by global shocks, remittances appear to be more resilient, only dipping slightly in 2020, when world growth slowed due to COVID-19, before rebounding in 2021. Remittances to LMICs have seen eight years of steady growth, consistently growing faster than the world economy. They rose by 42.4% between 2016 and 2023, according to official records alone. If you take into account informal flows, the figure is likely to be much larger, said Dilip Ratha, the World Bank’s expert on remittances. And since migration is the main driver of remittances, these figures are likely to keep growing, he said. “Migration flows are going to increase in the future due to climate change, demographic imbalances, and income differentials, and while FDI seems to have been going down since the global financial crisis, and ODA is also limited, remittances will be key,” Ratha said. The value of remittances Andrew Selee, president of the Migration Policy Institute, agreed that remittances will be crucial for lower-income countries but don’t get the attention they deserve. “There’s a disconnect between the world’s poor and lower-middle class who use remittances as a development strategy and the actual development strategies of governments, both national and donor ones, which largely ignore remittances. It’s very much a secondary topic in development conversations,” he said. This is partly because remittances are controlled by individuals — who send and spend them — meaning that governments can’t dictate what happens to the money, he explained. “The perception is that it’s a good thing when it happens but it can’t be controlled,” Selee added. Regionally, South Asia is the biggest recipient of remittances, accounting for $193 billion in 2024. Remittances to East Asia and the Pacific, excluding China, are forecast to hit $88 billion this year. Flows to Europe and Central Asia are expected to reach $69 billion; the Middle East and North Africa, $58 billion; and sub-Saharan Africa, $55 billion. By country, India was the top recipient of remittances in 2023, totaling $120 billion, followed by Mexico with $66 billion, China with $50 billion, and the Philippines with $39 billion. In terms of source, the largest share of remittances are sent by migrants living in the United States, followed by Saudi Arabia. Considering the numbers involved, what kind of development impact do remittances have? As they grow, could they replace ODA, or are they just another tool in the box? Remittances’ development impact “Remittances are mostly a positive story for development,” MPI’s Selee said. “We know that in most cases, remittances are a powerful factor in improving education, health care, nutrition, housing and sometimes employment opportunities for the recipients.” In Sri Lanka for example, remittance-receiving households had children with higher birth weights, while those in El Salvador saw much lower school dropout rates, according to the World Bank’s Ratha. “Many studies point to the beneficial impact of remittances on poverty. We see the poverty headcount ratio reduced in most countries where remittances are large,” he added. Remittances can also offer households a stable and resilient source of income. This is crucial when it comes to weathering economic shocks, with research showing that migrant workers tend to send more money home during economic downturns, as was shown during the COVID-19 pandemic when remittance flows only took a small dip. Flows also tend to go up in response to war, for example in Yemen in 2015. Dany Bahar, an associate professor at Brown University, described remittances as a “really useful flow” of financing since they promote consumption. “This is a great thing because one definition of poverty is deprivation of consumption,” he said. He also pointed out the similarity between remittances and unconditional cash transfers, or UCC. “We’ve seen all this hype over the last five years about cash transfers and the importance of giving directly to recipients. But remittances are just a form of UCC that's been going on for decades,” he said. Remittances, however, create inequalities in recipient communities, which is one of the risks. Remittances have been shown to drive up the price of goods locally since people have money to spend, while also inflating housing and land prices as families use money received from abroad to invest in property, Selee explained. Remittances can also reinforce migration patterns, although this tends to tail off after two generations once families are well off enough to get good jobs in their home country, Selee said. “So remittances have a long-term ability to reduce migration, but often increase it in the short term.” High costs Perhaps the biggest challenge associated with remittances at the moment, however, is the high cost of sending them — and sometimes receiving them — which ultimately means people end up with less. In 2023, the global average cost of sending $200 was 6.4%, or nearly $13, according to the World Bank. This is well above the Sustainable Development Goal target of 3%, which is an indicator under SDG 10 on reduced inequalities. For transfers to sub-Saharan Africa, the cost is closer to 8%. The SDG target of 3% won’t be met by 2030, according to Ratha. The main reason for the high costs is a lack of compatibility between money transfer systems and banks, Ratha said. Stringent regulations — including anti-money laundering and foreign exchange regulations — also make it difficult for new remittance service companies to set up or to operate outside of banks. That means less market competition, monopolies, and thus higher prices. Innovations, including the growth of digital transfers, mainly via mobile apps, are gradually starting to bring down the cost. But Ratha is skeptical about how much difference this will make in the near term. Cash still accounts for 80% of all remittance transactions, he said, and he doesn’t see that changing dramatically in the next few years. With around 1.4 billion people still without bank accounts, cash remains king. “Cash is accessible to everyone. If you have the cash, it is yours, no one can question it, and as long as there are undocumented migrants in the world and poor people who don’t have bank accounts, the world will still need cash-like instruments,” Ratha said. For remittances to go up and go further, costs need to come down. According to Ratha, the best way to do this is by increasing the “interoperability” of money transfer and banking systems and by reducing burdensome regulatory restrictions. Multilateral development banks can play a part, he said. The Multilateral Investment Guarantee Agency, or MIGA — the arm of the World Bank that promotes FDI into low- and middle-income countries — is exploring offering guarantees to mitigate the risks experienced by money transfer companies, such as expropriation and restrictions on currency transfer. These guarantees could help money transfer companies grow their operations in the global south and bring down costs, Ratha explained. MIGA could also offer guarantees to protect working capital loans for money transfer operators, and the World Bank is forming a Private Sector Working Group that will look into some of the issues that create high costs for remittances, Ratha said. No panacea But even if the cost of sending remittances can be brought down, experts are skeptical about their transformative potential. While remittances have lots of benefits for recipient households, they “are not the panacea which will reshape the world and promote huge economic growth,” Bahar said. Major economic growth and development “involves many more components,” including a structural transformation of the economy and sustained increases in productivity, he said — something that remittances alone cannot deliver. Indeed, the evidence seems to show that remittances don’t increase overall economic growth for countries, although it’s not clear why, according to Selee. Furthermore, while remittances have outperformed FDI and ODA in recent years — a trend that looks set to continue, Ratha does not see them as a viable substitute for either. FDI is needed for infrastructure and green investments, while ODA can help address public financing needs and externalities such as fragility and climate change, he explained. But countries should still “take note of the size and resilience of remittances,” he wrote in a recent blog post, “and find ways to leverage these flows for poverty reduction, financing health and education [and] financial inclusion of households.”